Should You Close Your Credit Card Account?
Posted by Gail | Filed under Credit Wise
With people buying into the idea that Debt-Free Forever is the new black, loads of people are now wondering what to do with all their cards in their wallets.
Gail, love the show. I’ve been walking around with dozens of credit cards and department store cards in my wallet for the past few years. And they seem to multiply all on their own. When I add up all the money I could spend, it makes me very nervous, especially since my sister-in-law’s wallet was stolen and she found out that her cards were being used by someone else. Yes, she did call the cancel, but forgot about the department store cards. So I was going to cancel all those cards when someone told me that if I do I’ll ruin my credit history. So now I don’t know what to do? Help!
Okay, you’ve finally paid off a credit card and now you’re wondering if you should close the account or keep the card active. Or you’ve reassessed how you plan to use credit as a tool and you find you are overstocked in the credit card department. Or you’ve come to the realization that you just have no self control and having all those cards is an invitation to dig a hole to Debt Hell. So should you cancel the accounts? Well, it depends.
How many credit cards do you have? If you have more than one or two cards, then closing the account may make sense for a couple of reasons:
- As long as the account is active there’s an ID theft potential.
- As long as the account is active you could end up using it again.
If your track record with revolving credit has been a little shaky, then maybe the temptation to spend will get the better of you down the road, and closing the card now will solve that problem. And if you’re concerned about your exposure to ID theft, you may want to eliminate this credit.
You might also want to eliminate this account if you’re planning on doing some “good” borrowing, and don’t want to be over-exposed credit-wise. Ya see, every piece of credit is taken into account when a lender is deciding whether or not to give you more credit. If you have too much revolving credit – credit you can tap at any time for any purpose – the lender must take that into account before giving you more credit.
While this “rule of lending” may have been shelved when lenders were rabid to extend credit to anyone for anything, with the recent tightening of credit there’s little doubt this rule is coming back into force. So if you’ve got a bunch of credit cards, they’ll add up all your limits – LIMITS, not outstanding balances – and do their calculations as if you have borrowed all that money already. Why? Because you COULD!
There are some downsides to cancelling a credit card account. Y’all know I’m not a fan of how the credit score is arrived at since some of the criteria used to create your credit score relate to how “profitable” a customer you’ll be. I, for example, do not have the best credit score because I refuse to carry a balance on my credit cards, and people who do carry a balance and pay regularly have higher scores because they’re more profitable.
The reality is that cancelling a card can create a short-term dip in your credit score, which in turn can affect your cost of borrowing. So you have to time the cancellation so that either you do your “good” borrowing first, or your credit score has enough time to recover.
If you don’t want to use the card, but you don’t want to create the blip on your credit score either, you can always cut up the card so you can’t use it. Or throw it behind the refrigerator, which means if you go for the card you’re also planning to clean!
Ultimately, having access to too much credit is never a good thing. And while credit cards are a useful tool, most people find a way to misuse that tool by carrying balances, racking up over-limit fees, or over-exposing themselves. Deciding to clean house and trim back on your credit exposure may hurt your credit score in the short term, but it could be a very good decision in the long run.
Of course, if you’re not borrowing at all for anything other than your mortgage and perhaps a car payment, and you use and repay your credit cards every single month, you’ll have a strong credit score that can take the slap of a few cancellations. And since you’re not borrowing anyway (hey, Debt-Free Forever! right?) who cares if your credit score dipsidoodles for a few months.
BTW: New Poll. Go vote!
January 12, 2010 at 7:13 am
We have only ever had one credit card. when we moved banks we closed one account and opened another one. I personally see no reason to have more then one open credit card account.
regards,
Jason
January 12, 2010 at 7:52 am
I have only two credit cards, and no department store credit cards. I have two credit cards in case where I am wanting to use it only accepts one or the other (ie. visa or mastercard but not both). Not common but has sometimes happened to me while travelling. I don’t carry any balances on them and the credit limit on both is not enough to cause difficulties in obtaining credit.
January 12, 2010 at 8:13 am
We have 3 cards…VISA used all the time and paid in full (great travel points)…mastercard for when VISA is not accepted…very rare so it’s rarely used…and SEARS which is used for gas for the car to earn Sears points which we then use for clothing…all paid in full AND all with reasonable limits…that way there is no temptation to use them for more than we could pay off in one shot..
One other point…if you are going to your bank for “good” lending..i.e. mortgage car loan etc and it turns out you have too much revolving credit we can close some cards for you as a condition of the credit…that way you don’t have to worry about doing it just before applying and being in that credit “dip”…
In my humble opinion though, having a visa and mastercard with reasonable limits is usually more than enough revolving credit for one person…
January 12, 2010 at 8:37 am
We have two cards – the points Visa which gets used for everything and paid off each month and a Mastercard with a very low limit that gets used rarely. The Mastercard is in my name alone so that I have a credit rating separate from my husbands if something should happen to him.
When I was 19 and in university with a low paying retail job I was able to get a credit card but my mother was not able to get one unless my father co-signed for her. So I have always had something on my own.
January 12, 2010 at 8:56 am
We have 3 in our house… a Canadian Tire MC, we’ve used the CT “Money on the card” to purchase gifts & things that we want around the house (like our carpet steamer) but weren’t ready to pay full price for. DH buys gas with this one.
Dh has one with a $500 limit, for booking hotels, online transactions only. Balance kept at 0
I have my own since I discovered that my own credit score was extremely low – due to the fact that I only had one small loan paid in full from a couple of years ago & a mortgage (which doesn’t show up) so I get a low mark because I don’t have a strong history. The CTMC is in DH name with me as a supplimentary card holder so it doesn’t record against me – I supposed if it wasn’t being paid they might come after me & put a mark on my credit though lol. I guess I am not profitable enough
So I have this card & use if for gas & groceries & transfer the $ over to pay the balance… Since I’ve had that card for a year now, I’ve seen my credit score jump by 250 points, so I am happy that when we renew our mortgage, we’ll be in better shape to negotiate through our broker.
The small increases in credit limits on all of these cards bugs me – they do it first & then let you know… that is dangerous ground for me, since it is tempting to see that as your new normal and see it as money to spend instead of credit. We’ve called to re-lower our limits our cards the last few times, but take it as a good sign that our credit score is improving.
January 12, 2010 at 9:06 am
After reading some posts a few weeks ago about protecting your identity I removed most cards from my wallet. I also use my credit card for daily purchases to rack up points and make a few days interest on my dollars in a savings account until I have to pay the credit card off.
I have however been burned by this method of spending. Even though I always pay my balance off in full there has been an incident where I didn’t see a bill or I forgot a bill or something went wrong in the online payment of a bill. Once I missed the deadline the interest started to rack up from the date of the purchase. Of course, I have continued to spend on the card during the interval when the bill was issued and the time I noticed the interest charge. So although I had paid my bill in full, the interest continues to rack up – even when I stop using the card. Those “free points” suddenly cost a lot of money.
I am more careful these days.
Oh and recently I sent away for my credit report from Equifax and TransUnion. Suddenly my email box began filling with “Warning: Your Credit information is being accessed – you need protection” emails. The senders were TransUnion and Equifax but when I read the fine print I realized it was a sales solicitation from an independant company. It creeps me out that people monitor even innocent requests and TransUnion and Equifax gave them my email address for sales purposes.
January 12, 2010 at 9:10 am
Hubbie & I each have one CCRD of our own for our own credit ratings. We have a shared MCRD and a shared Visa. We do not carry balances on these cards very often. The Visa is rewards based and paid in full each month. I occassionally use the MCRD and may carry a few hundred dollars on occassion. We are trying hard not to rely on credit. The only reason I have a Amex is because it’s the only card Costco accepts – annoying – but it doesn’t cost me anything to have and I pay it in full each month.
January 12, 2010 at 9:16 am
Wow, after reading all these posts on the numbers of cc’s, time for me to send some letters to do some cancelling. I’ve got a gazillion, but only 2 that are ever used. The rest I don’t even activate when the new card comes in, but if I want to get a vehicle loan next Jan, then I’d better cancel some cards so they’re wiped off my rating within that timeframe.
January 12, 2010 at 9:22 am
Great article in the Globe and Mail today about Gail!!
http://www.theglobeandmail.com/life/family-and-relationships/gail-vaz-oxlade-the-accidental-guru/article1424785/
January 12, 2010 at 9:37 am
@Lesson Learned- You make a great point about keeping a separate credit rating for yourself. I need to look into this for myself. I know I have at least one card in my name only that we got in order to get a discount on a large purchase. But it’s a department store card and we never use it. I would like to cancel it, but I don’t want to lose the only card in my name. I doubt I would qualify on my own for a new card with the tightened lending standards out there now. Thanks for reminding me to get going on this!
January 12, 2010 at 9:56 am
Gail, I have a question.
How can you get your credit score if you don’t have a mastercard or visa. I tried calling them but everything is voice automated and you never get to speak with a real person.
Thanks.
January 12, 2010 at 11:04 am
@ TK – you need to be extended credit. So perhaps a mortgage, or a line of credit in your name, or a car loan, etc.
January 12, 2010 at 11:23 am
Thanks for the great article Gail! I had three credit cards: Sears, Visa, and Mastercard. I cancelled my Sears as I found it promoted bad spending and I heard some negative things about their ability to properly and timely mail out statements. My Visa only has a $500 limit and my Mastercard has a $10,000 limit. After going into debt hell with my mastercard, I have handed the card over to my partner and am solely working at repaying it. Now when I think I need my mastercard, I have to actually to my partner. Talking about plans to spend makes me so much more accountable.
January 12, 2010 at 11:54 am
I’ve had one credit card, since college, (7 years ago), and don’t plan on getting another one…. it works for me!
January 12, 2010 at 11:57 am
I just discovered your show Gail, and I love it! Are there new shows to be aired for 2010?
January 12, 2010 at 12:03 pm
TK:
Are you trying to find out what your credit score is? I don’t know if that info available to “joe public”. I’d make an appointment with someone in a bank. Maybe they can tell you.
Are you trying to see what’s on your credit report? You have to write a letter to transunion or equifax. The details are on their websitesm
Or are you trying to develop a credit score? Even having a phone or cable bill in your name will activate a credit file.
Cheers!
January 12, 2010 at 12:29 pm
I just have a question about the budget spreadsheet. Wasn’t sure where to post it so I’m doing it here.
You say to input the Net income as what we actually bring home. But won’t the deductions for medical, etc., be doubled if I don’t add them back into the Net since they’re subtracted separately on the sheet?
Love your show! You TDDUP planner arrived yesterday so I’m doing my budget now!
January 12, 2010 at 1:12 pm
TK, you can download and print an application form from TransUnion to get your credit report. They’ll do it off your SIN if you don’t have a CC.
January 12, 2010 at 1:44 pm
READ YOUR CC CONTRACT!
I recently received a notice from my credit card company (READ THOSE NON-COMMERCIAL INSERTS) that the terms have changed.
There are giving me the impression that if I DO NOT use my credit card during a 12-month period, I will get charged a FEE!
So if you do want to use your credit card, you might want to cancel it if it will cost you!
There was a warning that this type of policy might become the norm in the US, but I guess Canada’s laws allow to for this.
MBNA CC holders, read your notices!
January 12, 2010 at 1:52 pm
Department store cards are a great deal — for the department stores. I got rid of my Bay card after finally noticing the horrible interestest rate (never carried a balance). How I wish the Bay clerks would not ask me about getting a Bay card EVERY time I bought something there…
January 12, 2010 at 2:14 pm
@AnnaM
I can help you with that, your talking about the Variable Expenses right? When you say Medical? But it’s already deducted from your Gross Income I’m assuming?
Just put down what you have for Net Income (yes what you bring home), the Medical part on the Variable Expenses is for the extra costs like my retainer costs, since my insurance won’t cover the cost of me getting another retainer since I constantly lose it, or other costs associated with what what you buy if you get injured or something like that ( I ASSUME), another example would be the cost for the husbands orthotics, his insurance only covers a certain amount and than we have to cover the cost of the rest, or dental costs…stuff that won’t be covered by your insurance. That’s what I thought it meant, I could be wrong and if I am someone could claify that for me.
But if you have more questions that I can hopefully help ya with just email me at cnewhook@mcsnet.ca.
Hope it helps,
Connie
January 12, 2010 at 2:45 pm
On a completely unrelated topic (or not so unrelated since it’s all about debt), I heard a weird ad on the radio this morning. It was for a mortgage company who wants to help all those people who have holiday debt by consolidating the debt onto a mortgage. “You could even save $1000s in interest!” these helpful people boast.
It could just be us, but wouldn’t it be better not to spend money you don’t have for Christmas and then not have debt? The ad got me because it assumed that holiday debt was normal, like gray hair as you get older.
January 12, 2010 at 2:46 pm
Good point about too much credit promoting overspending and getting people into trouble. Canadian Tire gave me a credit card with a ridiculous spending limit when I was 16. They allowed cash advances through the store, and I was on the debt train (there ought to be a law…).
Rather than cancel the cards outright – and potentially incurring a hit to your credit rating – would requesting that the spending limit be reduced to a reasonable level (say, $500) affect your credit rating?
January 12, 2010 at 3:00 pm
Marie, most CCRD companies will charge you an ‘inactive fee’ if you do not use the card for 12 consecutive months as it cost the bank to maintain the account for you. It was a god idea for you to advise people of this fee. Reading the fine print IS important.
As a banker, I have noticed that many customers don’t realize that just because you choose not to activate a card does not mean that the account is not ‘active’ and part of your credit history. Activating the card is just allowing you direct access. If you changed your mind on a card, advise the company to cancel the account.
January 12, 2010 at 3:21 pm
Hubby has a VISA, I have a VISA (I want my own credit history and urge all women to get a card in their own name) and we share a MasterCard. All reasonable credit limits. I make sure I use each one a little bit through the year paying it off at the end of the month. We don’t have the point thing on VISA per se….but get a $$ rebate in January for money spent. Again…our limits are not high as we don’t use CC’s much.
I also have a SEARS card as does hubby (they nabbed him on a bad day) and I have a BAY card. These are used very, very seldom. But, it is nice to know I have them when I get to a city and can get what I’m NEEDING on sale. Also paid off at the end of the month.
I remember helping my Mom with her CC payment one day and noticed she had a limit of $16,000. What? I had her contact CIBC the next day and get it lowered to $5,000. As per usual, an increase without asking for it.
YIKES! Dragon alert! Batten the hatches! Pull up the drawbridge!
Our heat pump is on the fritz. Just got off the phone. Repairman coming tomorrow a.m. sigh……
January 12, 2010 at 3:48 pm
I just cancelled a Platinum card with a $15K limit, which costs me a yearly fee, and have replaced it with a plain ole VISA with a $1,500 limit with no yearly fee.
Now that I have an emergency fund, a savings account for home maintenance, one for vet bills (we have lots of pets) use mostly cash and don’t buy things on impulse or things I don’t need (thanks Gail!!!) I only want a credit card for times when one is absolutely necessary and with a limit that I can easily pay off each month. I don’t trust myself with the higher limit card & it’s been frozen in the freezer for the past year, so I wasn’t using it anyway.
My partner has a Mastercard with a very high limit that he pays off every month, as well as an LOC of $40K that he owes nothing on, so we have access to lots of credit should we need it. But thanks to following Gail’s rules we use mostly cash and save for big purchases now. It’s very freeing!!!
January 12, 2010 at 4:05 pm
I watch for CC offers that come in the mail that extend Credit at 0% interest for longer then a couple of months. I just switched the balance of a car loan ($6K) @ 2.9% to a MBNA CC that offered 0% for 15 months (Till Dec 2010) I don’t used the card once the transfer is done and then never again after that. They are few and far between but they do come, I’m sure they hate customers like me but I’ll get over it.
January 12, 2010 at 4:09 pm
Calling the credit cards to LOWER your limits is useful in reducing your potential liability too. It takes a couple minutes, and they try to talk you out of it, but they can’t really say no can they? Then do like Gail says and just leave it at home. (and make sure you can’t find the numbers for your favourite on-line shopping sites!)
January 12, 2010 at 4:35 pm
Anna M. – the medical in the spreadsheet refers to extras like saving up for chiro visits or glasses not MSP etc… Just put in the total amount your paycheque is and leave the extra deductions where they are, do not double include them.
Retailers have rules that the cashiers must follow such as asking every customer if they would like a cc. If they do not ask they can be fired or get less hours. Yes it is annoying but retailers make a lot of money on those cards and sometimes it makes or breaks their bottom-line. In today’s economic times when only Walmart is growing you will see this more and more. Please don’t get mad at the cashier’s —it is just in their job description.
January 12, 2010 at 7:00 pm
I am recovering from bankruptcy…. will be cleared next year. I got a secured credit card 5 Years ago and have built good credit with the company. It is the only credit card I have (that I can get). My credit limit just more than doubled a few months ago. Does it affect my credit history, that I am working very hard to rebuild, if I lower the limit? Does anyone have any other advice for rebuilding credit after bankruptcy? Thanks all!
January 12, 2010 at 7:10 pm
@Connie
and
@Stephanie,
Thank you both so much! You answered all my questions. Thank you for helping me.
January 12, 2010 at 8:12 pm
I have a MasterCard for vacations and online shopping, and an AmericanExpress card for business travel. Both get paid in full automatically every month. Then there’s an overdraft line of credit of three net month incomes, which I have last used last summer, when the repair shop managed to get my car finished in half a day instead of the expected three, and next month’s pay was not yet in. It summed up to 23 cent in interest, but it still irks me.
No idea about my credit rating: The rules by which credit rating is determined here (Germany) are arcane, secret, differ between rating companies, and, according to experiments the statistics collated into them are outside of a person’s control anyway. Enquiring for them would be a waste of money.
January 12, 2010 at 10:20 pm
I have a Visa (bank co-branded) card and an Amex (bank co-branded) card with a single credit limit. My bank decided that now I am a good payer (out of debt) to up my Visa to a Visa Platinum. I didn’t ask for it and, after seeing the annual fee, didn’t want it. I never actitivated it.
The bank “cancelled” the unactivated card (how do you cancel an unactivated card?) but I received a letter saying I might want to remove the card from the credit database (things are different where I live). As the card didn’t actually give me any more credit, should I remove it or leave it?
January 12, 2010 at 10:49 pm
Melaniesd:
I know that some Store’s credit accounts get closed when not used. Ok, at least there is no fee.
I just don’t remember (did I miss it) reading that MC and VISA charge you for that. If they do, why would Gail recommend to leave accounts opened and unused?
January 12, 2010 at 11:08 pm
[...] This post was mentioned on Twitter by Kotak Credit Card, Lora and PFS, Dennis Smock. Dennis Smock said: Should You Close Your Credit Card Account? « gailvazoxlade.com http://bit.ly/8U9gyL [...]
January 13, 2010 at 12:36 am
Wow, a lot of great info.
My boyfriend and I each have a BMO mastercard. My boyfriend’s is at $1000, with 11% interest, after consolidating two $500 cards charging 18%. My card is at $8300 with 11% interest, brought down from 18% after switching to an annual fee card.
I was talking with him about the possibility of just closing our accounts and getting them paid off, but now that I’ve read all this, It might be better to keep them. His limit is reasonable, and as I pay down mine, maybe I can get the limit of $9800 dropped until it, too, is $1000, as well as paying it off in full.
Plus, we’ve both run into situations where we had run into the end of the money when something essential came up to purchase. For example, fuel to make it home when there’s no money in the bank, and payday is 2 days away. Poor budgeting, true, but this was way before I found this site, and our budgeting system is far from perfect so far.
Thank you everyone.
January 13, 2010 at 7:16 am
Marie, the credit card companies desperate to cover their losses — and there are more to come — because of defaults are tacking on fees any place they can. Traditionally, there have’t been fees so it made no difference if you closed the account immediately. If your credit card company is now threatening a fee you have two options:
1. close the account completely, or
2. Make sure you put one charge (which you pay off immediately) on your card to avoid the fee.
January 13, 2010 at 4:40 pm
I have two credit cards as well, a VS and a MC, MC has 0 balance and VS unfortunately I got into some trouble with when I was out of work for a year but will it be paid off in about 12 months now and I will have accumulated a nice little savings by then. I feel like i’ve finally got things on track, I have zero desire to use my credit cards but worry about cancelling them as I don’t want to screw up my credit rating. I too have noticed that the credit card company has increased my limit on both cards to 10K (!!!!!) and as an above poster asked, am curious to know if I call and get it lowered to something reasonable will that somehow negatively affect my credit rating?
January 13, 2010 at 6:26 pm
Nichole, the short answer is: probably.
One part of the credit assessment is to look at the % of credit that’s being used, versus available.
So if you owe $100 total but have two $500 limit cards, you are using $100 out of $1000 ($500 x 2) available credit, or 10%.
Let’s say that $100 was all on card A. If you cancel Card B, you are now using $100 out of $500 available credit, or 20%. Or if you reduce Card B by x %, your use of available credit goes up by x %, etc.
The higher up on the scale, the more risky you are perceived to be. Which in the overall outlook makes sense — I mean if you were to extend $500 credit to a friend, and he immediately borrowed $499, you might be nervous. On the other hand, if he borrowed $5, you might not totally freak out. Not that I’m advocating loaning to friends, you often lose the money and the friend.
Personally, I think two cards is very reasonable and would not cancel either. Be sure there aren’t any fees on those cards, though.
g
January 13, 2010 at 6:55 pm
Nichole:
Some recommend using no more 50% while other 75% of your available credit (I don’t know if LOC are included in that). I think I got those percentages from Equifax and Transunion. Above that, your # drops, below that, they consider you ‘ok’. If you pay on time, they consider you ‘ok’. If you do all that and pay interest, they think you are ‘better than ok’, but Gail does not.
January 14, 2010 at 8:12 am
TD Visa will no longer be issuing auto increases to VISA accounts…they must have the clien’t agreement BEFORE any increase…probably the same is true for other VISA’s as well…should help stop the credit madness!..lol..
January 14, 2010 at 10:47 pm
Hi everyone,
Just wondering if anyone knows how long the dip in credit score lasts after cancelling a credit card?? My husband and I would like to close our Sears and Bay accounts but not if the effects are long lasting. Anyone have an idea??
January 17, 2010 at 6:26 pm
[...] Should You Close Your Credit Card Account? | Gail Vaz-Oxlade [...]
January 18, 2010 at 10:40 am
I had heard exactly what Geoff had said, that by cancelling a card, the percentage of debt used vs available goes up which looks bad on the credit report. Also, I don’t like to cancel the cards just in case an emergency comes up and you need instant access to cash. I do store them in my safety deposit box to limit access (by me and also by scammers).
Susan
January 18, 2010 at 11:04 am
Which credit cards now have the lowest itnerest rates? Citibank Mastercard is raising its rates from 9.9% to 23.99% after March! Very hard to swallow. Not sure I want to keep my account open now.
January 18, 2010 at 5:01 pm
For me, I was so fed up with the companies, between raising rates on my zero balance cards to being just difficult to deal with and closing accts for no reason other than inactivity despite my good credit score. I closed accounts and yes it hurt my score, but I won’t give you my business if I am not treated well. I plan to be debt free by the end of the year and I wish any of those companies try to regain my business. A big fat no!!!
February 1, 2010 at 4:01 pm
My question is : Are any points cards actually worth it when often you end up paying yearly fees for them?
After I pay off all my debt my partner and I might consider one for obtaining flight rewards, (we have looked at Avion and a few others), but I see many of them have huge fees and many restrictions.
Are they really worth it overall? Does anyone have good strategies for accumulating points on these cards?
I know in general using a credit card when you can is better then your debit because you don’t have to worry about your banking plan transactions, (as long as you go home and pay it off right away of course).
Thank you!
March 17, 2010 at 4:13 pm
@ Nichole January 13, 2010 post. Lower those credit limits asap!! That happened to my husband and I . Sure enough an “emergency” would come up over and over and before we knew it we were in cc debt of $19,000. A $10,000 credit limit is ridiculous and irresponsible of the cc issuing companies. Unless you earn $150,000 or more I would lower the limit to what is was. Why risk the temptation? Also I do not think it affects your score at all. After all you did not request the increase and have not charged against it yet.